Venice InLine, Inc., was founded by Russ Perez to produce a specialized in-line skate he had designed for doing aerial tricks. Up to this point, Russ has financed the company with his own savings and with cash generated by his business. However, Russ now faces a cash crisis. In the year just ended, an acute shortage of high-impact roller bearings developed just as the company was beginning production for the Christmas season. Russ had been assured by his suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers were unable to fully deliver on this promise. As a consequence, Venice InLine had large stocks of unfinished skates at the end of the year and was unable to fill all of the orders that had come in from retailers for the Christmas season. Consequently, sales were below expectations for the year, and Russ does not have enough cash to pay his creditors.

Well before the accounts payable were due, Russ visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Russ that there should not be any problem getting a loan to pay off his accounts payableproviding that on his most recent financial statements the current ratio was above 2.0, the acid-test ratio was above 1.0, and net operating income was at least four times the interest on the proposed loan. Russ promised to return later with a copy of his financial statements.

Russ would like to apply for a $120,000 six-month loan bearing an interest rate of 3% per year. The unaudited financial reports of the company appear below:

Assets
Current assets:
Cash	$	112.4	$	245.0
Accounts receivable, net		125.0		80.0
Inventory		250.0		150.0
Prepaid expenses		40.0		28.0
Total current assets		527.4		503.0
Property and equipment		380.0		270.0
Total assets	$	907.4	$	773.0
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	276.0	$	145.0
Accrued liabilities		25.0		30.0
Total current liabilities		301.0		175.0
Long-term liabilities		-		-
Total liabilities		301.0		175.0
Stockholders' equity:
Common stock and additional paid-in capital		150.0		150.0
Retained earnings		456.4		448.0
Total stockholders' equity		606.4		598.0
Total liabilities and stockholders' equity	$	907.4	$	773.0

Venice InLine, Inc. Income Statement For the Year Ended December 31 (dollars in thousands)
	This Year
Sales (all on account)	$	635.0
Cost of goods sold		403.0
Gross margin		232.0
Selling and administrative expenses:
Selling expenses		93.0
Administrative expenses		127.0
Total selling and administrative expenses		220.0
Net operating income		12.0
Interest expense
Net income before taxes		12.0
Income taxes (30%)		3.6
Net income	$	8.4

equired:

1-a. Based on the above unaudited financial statement of the current year calculate the following.

• Current ratio
• Acid-test ratio
• Ratio of net operting income to loan interest

1-b. Based on the statement made by the loan officer, would the company qualify for the loan?

2. Last year Russ purchased and installed new, more efficient equipment to replace an older plastic injection molding machine. Russ had originally planned to sell the old machine, but found that it is still needed whenever the plastic injection molding process is a bottleneck. When Russ discussed his cash flow problems with his brother-in-law, he suggested to Russ that the old machine be sold or at least reclassified as inventory on the balance sheet because it could be readily sold. At present, the machine is carried in the Property and Equipment account and could be sold for its net book value of $79,000. The bank does not require audited financial statements.

a. Calculate the following if the old machine is considered as inventory.

b. Based on the 2a answer would the company qualify for the loan?

c. Calculate the following if the old machine is sold off.

d. Based on the 2c answer would the company qualify for the loan?

2

Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 600,000 shares of common stock were outstanding. The interest rate on the bond payable was 10%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the companys common stock at the end of this year was $23. All of the companys sales are on account.

Weller Corporation Comparative Balance Sheet (dollars in thousands)
	This Year			Last Year
Assets
Current assets:
Cash	$	1,100		$	1,330
Accounts receivable, net		10,100			7,900
Inventory		12,700			11,000
Prepaid expenses		690			590
Total current assets		24,590			20,820
Property and equipment:
Land		9,500			9,500
Buildings and equipment, net		46,175			39,056
Total property and equipment		55,675			48,556
Total assets	$	80,265		$	69,376
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	19,100		$	19,100
Accrued liabilities		960			760
Notes payable, short term		140			140
Total current liabilities		20,200			20,000
Long-term liabilities:
Bonds payable		9,400			9,400
Total liabilities		29,600			29,400
Stockholders' equity:
Common stock		600			600
Additional paid-in capital		4,000			4,000
Total paid-in capital		4,600			4,600
Retained earnings		46,065			35,376
Total stockholders' equity		50,665			39,976
Total liabilities and stockholders' equity	$	80,265		$	69,376

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	80,100		$	65,000
Cost of goods sold		43,845			39,000
Gross margin		36,255			26,000
Selling and administrative expenses:
Selling expenses		10,600			10,100
Administrative expenses		6,500			6,900
Total selling and administrative expenses		17,100			17,000
Net operating income		19,155			9,000
Interest expense		940			940
Net income before taxes		18,215			8,060
Income taxes		7,286			3,224
Net income		10,929			4,836
Dividends to common stockholders		240			600
Net income added to retained earnings		10,689			4,236
Beginning retained earnings		35,376			31,140
Ending retained earnings	$	46,065		$	35,376

Required:

Compute the following financial data for this year:

1. Accounts receivable turnover. (Assume that all sales are on account.) (Round your answer to 2 decimal places.)

2. Average collection period. (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal places.)

3. Inventory turnover. (Round your answer to 2 decimal places.)

4. Average sale period. (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal places.)

5. Operating cycle. (Round your intermediate calculations and final answer to 2 decimal places.)

6. Total asset turnover. (Round your answer to 2 decimal places.)